Over the course of different Governors and different General Assemblies, the State of Illinois has underfunded its retirement systems while approving expensive benefit enhancements. The modest benefit reforms enacted in Public Act 94-0004 represent a small step toward recognition that the retirement benefits granted to public employees have become unaffordable for the State.
The contributions required to bring the systems to 90% funded by 2045 are rapidly crowding out spending on other State programs. The projected $4.0 billion required payment for pension bond debt service and system contributions in 2010 will likely represent 7% of the State’s total
operating budget. The more the unfunded liability is allowed to grow, the more the costs of current government services are shifted onto future generations.
The State of Illinois must implement comprehensive pension benefit reforms if it is ever going to seriously address the long-term costs and liabilities of its five retirement systems. A model for sound pension benefit restructuring was provided last year upon the approval of landmark pension and healthcare reforms for the Chicago Transit Authority through HB 656. The General Assembly, as part of omnibus mass transit funding and structural reform legislation,
implemented the following CTA pension reforms:18
• Increasing employee contributions to the pension fund from 3% of payroll to 6%;
• Reducing the amount of pension benefits available at age 55 with 10 years of service (pension benefits were formerly available at age 55 with 3 years of service) for new hires;
and
• Making full pension benefits available at age 64 with 25 years of service (full benefits were formerly available at age 55) for new hires.
The General Assembly should consider the same types of reforms for the State’s five retirement systems. Because the Illinois Constitution protects employees’ pension benefits once granted, benefit levels can only be scaled back for new hires. In addition to scaling back unaffordable benefits, the State must also end the practice of taking pension contribution holidays.
18 See Illinois P.A. 95-708.
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Fund State Pension Systems at Certified Contribution Amount
The State of Illinois has a responsibility to follow the mandate of the 1995 pension funding reform law. Fixing the pension funding problem requires discipline and sacrifice. We urge the State to fund its pension obligations at the full amount required by the 1995 law each year. The State should not add new programs and recurring operating expenditures until it pays down its existing, constitutionally-guaranteed pension obligations. Each time the State reduces
contributions to the retirement systems, it is deferring expense to future years.
Impose a Moratorium on New Pension Benefits
The General Assembly approved the Pay-As-You-Go Act as part of P.A. 94-0004, which requires that any State pension enhancements also provide for their own funding. While this plan is a more fiscally responsible approach to pensions than the State has had in the past, the General Assembly can still add to the State’s already unaffordable pension plans if it identifies new revenues, thus potentially leaving taxpayers on the hook for continuously expanding benefits and costs. The State should impose a moratorium on any new employee benefits until the pension system has achieved a 90% funded ratio. We call on the legislature to reject, and the Governor to veto, any new pension enhancements regardless of whether they are tied to
additional funding sources.
Raise the Retirement Age for New Hires
Members of the State’s retirement systems are currently eligible for full retirement benefits when they reach age 60, unlike most private sector retirement systems, which make 65 the minimum age of retirement with full benefits. The Civic Federation believes that the age at which
employees become eligible for full benefits should be increased to age 65 for employees with between 8 and 30 years of service, age 62 for employees with between 30 and 35 years of service, and age 60 for employees with 35 or more years of service.
Fix Automatic Increases for New Hires at the Lesser of 2% or the Rate of Inflation
The current rate of automatic increase for retirement annuities is 3% per year. Other retirement systems index the rate of increase to the rate of inflation, limit the dollar amount of increase, or approve new increases on an ad hoc basis. For new hires only, automatic increases should be limited to the lesser of the rate of inflation or 2% and should apply only to the first $12,000 in annual pension payments for retirees covered by Social Security and $24,000 for retirees not covered by Social Security.
Require Balance on Pension Boards between Employees, Management, and Taxpayers The State should require a balance of employee, management, and taxpayer interests in the governance of its retirement system Boards. Board seats should be set aside for members with professional expertise or certification in financial asset investment, and all members who do not already possess such expertise should be required to receive some relevant financial training on an annual basis.
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18 Require a 1% Increase in Employee Contributions
Employees covered by the State retirement systems contribute a percentage of their
compensation for their own pensions and to fund survivors’ benefits. For example, for members of the State Employees Retirement System (SERS), employees covered by the regular retirement formula are required to make the following contributions:
• Members with Social Security: 3.5% of compensation (pension) + 0.5% (survivors) = 4%
total
• Members without Social Security: 7% of compensation (pension) + 1% (survivors) = 8%
total
The Civic Federation believes that all public employees covered by the State’s five retirement systems should contribute an additional 1% of their salaries to the cost of their pensions.
Study the Costs and Benefits of Conversion to a Defined Contribution Plan
The State should undertake a study to determine both the costs and benefits of moving to a defined contribution pension plan such as is now the private sector standard. Such a move would require a very large infusion of assets into the system, such as from a multi-billion dollar asset sale or pension obligation bond issue. This would be necessary because the State would still be required to provide benefits to employees in the existing defined benefit plans for decades. This obligation would persist even as the funding stream for those plans diminishes with the shift of new employees into the new defined contribution plan. There would also be a need for start up funds for the new defined contribution plan.
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